Tuesday, October 30, 2012

Double Ramp-Up in NOC Section 8 Damages

Apotex Inc v Merck Canada Inc / alendronate (NOC) 2012 FC 1235 Hughes J

Under s 8 of the NOC Regulations, if a patentee is unsuccessful in NOC proceedings, a generic which has been kept out of the market by the statutory stay is entitled to damages. While a number of cases have addressed preliminary questions regarding section 8, this is only the third decision quantifying those damages, after the ramipril companion cases decided by Snider J in Teva v Sanofi-Aventis / ramipril 2012 FC 552 and Apotex Inc v Sanofi-Aventis / ramipril 2012 FC 553 (Blogged herehere and here). Hughes J adopted (at [10]), the same approach used by Snider J in the ramipril cases, which compares the “but for” world which would have been if the generic had not been prohibited from entry by the statutory stay, with the real world, with one important caveat. In Merck Frosst Canada Ltd v Apotex Inc / alendronate (NOC) 2009 FCA 187 var’g 2008 FC 1185 the FCA held that the generic is entitled only to losses incurred during the statutory period. Apotex had argued that it was entitled to compensation for loss of permanent market share - springboard damages - but the FCA held that losses incurred after the statutory period are not compensable even if they were caused by the statutory stay.

In many respects the quantification exercise was remarkably straightforward. Hughes J provided a clear and logical structure of issues to be addressed such as the relevant period, the overall market size, generic share and so on [10]. He also identified four key factual determinations relating to when a generic would have entered the marketplace, such as when the generic would have had manufacturing capacity [44]. The parties agreed on many key factual issues, both at a broad level (for example, they agreed that “the [generics'] share in the ‘but for’ world, is the same as the share occupied by the generics in the subsequent ‘real world’ period” [42]) and at a more detailed level (agreement that the generic price would generally be set at 70% of brand price with only one generic in the market, and 63% with multiple generics [75-77]). There were of course a few factual disputes resolved by Hughes J, but on the whole this decision gives some reason for hope that quantification of s 8 damages may not always be a difficult exercise once the basic legal principles are clarified.

There was one contentious point of legal principle, related to the issue of “double ramp-up” [81-87]. “When an organization introduces a new drug product into the marketplace, there is an initial period during which the product has to be made or acquired, orders received from customers, and the product is to be shipped to customers” [81]. This is the ramp-up. The difference between the profits during the ramp-up period and the profits during the same time in the steady state is the “ramp-up loss.” The experts for the parties agreed that to determine Apotex’s profits in the “but for” world, this ramp-up loss must be taken into account, so that Apotex’s profits would be somewhat lower than if it had been able to sell at full capacity for the entire period [82]. The experts for the parties also agreed that as a matter of accounting practice and causation, Apotex should not suffer a double ramp-up loss [82]. Apotex actually suffered a ramp-up loss in the real world, and if a ramp-up loss is also deducted in constructing the “but for” world, then Apotex will face a double ramp-up loss, even though in either the real world or the "but for" world, the loss would have been suffered only once, albeit at different times. 

However, as noted above, the FCA has held that losses incurred outside the statutory period are not compensable, even if they were caused by the stay. Consequently, iApotex Inc v Sanofi-Aventis / ramipril 2012 FC 553 [265-270] Snider J refused to allow Apotex to deduct the ramp-up loss that occurred in the real world, holding that this was precluded by the FCA decision. Hughes J disagreed with Snider J on this point:

[86] I am not satisfied, particularly given the common view of the accounting experts that, normally, compensation would be made to prevent a double ramp-up loss, that the Court of Appeal had this situation in mind.

Nonetheless, citing “the interests of comity and in the expectation of an inevitable appeal” he followed Snider J and he refused to allow compensation for the double ramp-up.

I expect that Hughes J is right to say that the FCA did not have this situation in mind, although Snider J’s holding that the principle enunciated by the FCA nonetheless covers the ramp-up issue has considerable force. It would have been instructive, and no doubt helpful for the FCA, to have had Hughes J’s analysis of the issue. I am not sure that the principle of comity required him to follow Snider J. The functional justification for following prior decisions of the same level of court is that once enough cases have consistently addressed a point of law it should be considered settled; legal certainty should not require an appellate decision. But a novel point of law should not be considered settled by a single decision. It would be perverse if the first judge to address a legal point decided one way, and five subsequent judges all disagreed, but nonetheless followed the first judge, simply because he was first.

On the whole, this decision suggests that many of the factual points arising from s 8 litigation may be relatively easy to settle, but the legal points will be settled narrowly and so will require many trips to the FCA.

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